The Bailout for the Big Three automakers will be on the list of topics for FTR, especially since Alabama U.S. Senator Richard Shelby is taking a lead position against giving those Michigan automakers any of the stash of bailout cash. We'll also discuss some Alabama economic stories and that court decision against the so-called "double dipping" policy imposed by Post-Secondary Chancellor Bradley Byrne. Press Register's Capitol Reporter George Altman and The Mongtomery Advertiser's Sebastian Kitchen (top-left) are the panelists.
Tim,
ReplyDeleteA few items regarding autos, unions, etc.:
1) Domestics are at a $2,000 per vehicle cost disadvantage relative to transplants and imports. Not being in manufacturing, you need to think long and hard about the meaning of this statistic.
For the exactl same price to the consumer that you (a domestic) seek, your competition can (and do) add up to $2,000 worth of real upgrades in terms of features, materials, safety, testing, warranty, etc. You cannot escape this fact by hiring better engineers, deploying more clever marketing, or increasing efficiency through more enlightened management since ALL car companies draw upon the same world-wide pool of talent to staff these functions. The only thing you can do is to take $2,000 of consumer value out of each vehicle and then attempt, by hook or by crook, to sell them for the same price as your competition.
2) On unions, your point that wages are bid up by unions is a good one and inures to the workers’ benefit. However, there are many more consumers of autos than there are workers producing them. The same wages that are good for a small number of workers cause a much larger number of consumers to overpay for the product. I am not arguing that wages should go down or up or stay the same. I am only making the point that the higher wages you seem to favor come at a cost. There really is no such thing as a free lunch.
Furthermore, you are not correctly analyzing the power relationship between the unions and management that has brought the domestic industry to the point where we see it today. It is simply not possible for management to deny union demands even though those demands spell doom for the company. Similarly, it is impossible for the union to moderate its demands even though its leadership is fully aware such demands will mean the end of the company and the ruin of the union. I suspect you are rightfully skeptical that two organizations would operate in full awareness that their actions ensure the demise of both entities. It is, I assure you, the absolute truth that they do so. Here’s how:
Company: Any position the company takes during contract talks that may result in a strike by the union cannot be held. The reason is that management has a fiduciary (legally responsible) duty to the company’s shareholders to act in their interests. Since a strike (or lockout, more appropriately), will idle the company’s plants and affect shareholder value, we need to analyze the probable chain of events likely during a long, bitter impasse over a critical issue such as a 50% reduction in pay to all management and union employees. When the plants go idle, no cars are produced which leaves the customer base to pick over the approx. 60-90 day supply of already-built vehicles in the distribution chain. Obviously, as more desirable models are purchased first and consumers expect to buy what they wish rather than what is available, sales would crater well before the expiration of the three month period. At any rate, let us assume the money keeps rolling in until three months are up. The question is: can the lockout pressure the union during that period of time to accede to management’s demands? The answer is no. The union will spend not one dime until all deferred compensation, accrued vacations, job bank credits, SUB (supplemental unemployment benefits), and federal, state, and local unemployment benefits are exhausted. For a period of at least six months, the company would have no income from sales while still experiencing significant costs related to non-union employment, benefits payments, financing and a myriad of other fixed costs. Meanwhile, the company’s competitors, both foreign and domestic, would be delivered its entire market share at no cost. While the company could, theoretically, regain some or even most of its prior market share, some significant amount would be lost to the company on a going-forward basis. Taken together, cushions against work stoppage negotiated previously by the company and the union, coupled with the fiduciary duty to preserve shareholder value, put the company in a position where it cannot credibly threaten the union with going out of business unless its demands are met. The final alternative to the company of replacing union members with non-union labor has been denied it by federal labor legislation.
Union: The union, aware of its position of power over the company, is forced to demand the company provide unsustainable benefits right up until the very day the company is forced to close it doors. The reason the union, fully aware of the consequences of its actions, cannot work with the company to moderate its demands is found in the very democratic structure that gives the union its power in the first place. In order to secure election to leadership in the union power structure, promises are made to the membership that the company will never be allowed to go back on pay levels, work rules, or benefits it has previously contracted to provide. If one prospective union leader points out that this position is untenable and bodes ill for both the company and the union in the long term, his opponent will take advantage of his “weakness” by declaring he will never flinch in the face of management demands for sacrifice from his union brothers and sisters. Surely you can pick the winner of a democratic election between these two candidates. The “untouchable” issues from the union perspective are those issues that concern existing, voting union members - current levels of pay and benefits for existing workers and future retirement benefits for them – exactly the major cost drivers ruining the domestic companies. Issues that the union IS willing to negotiate include minor work rule changes, introductory low-wage periods for new hires (always leading to full-wage union jobs, however), marginally looser limits on outside contractors and outsourcing, new technology allowed, etc. Note that none of these issues substantially effect the competitive disadvantage of the domestic respecting their transplant and import competition.
3) Incentive packages offered by states to attract auto companies (especially transplants) to locate in Alabama or other Southern states do NOT represent a loss of taxpayer money. In fact, they represent huge increases over the status quo ante. Consider, Tim, that before a plant is built, tooled, and put into production, the land is generally farmland. It is generally taxed, if at all, at the most favorable (lowest) rates of any other types of land in use. The proper comparison is NOT between what the transplant would be paying if it were not receiving abatements versus what it currently pays. The proper comparison is between what the transplant is paying (and will pay) and what was (and would have been) paid previously on the land at the farmland rate. Infrastructure improvements paid for by the taxpayer to secure a company’s relocation are investments that pay dividends for years to come in the form of other companies that will now consider an Alabama location versus an unimproved one in Georgia, for example. More companies equate to increased tax revenues, if not immediately, then assuredly in the future after the abatement period expires (usually 6-12 years).
williakz